Business optimism lower for Q3, rises for Q4 2016

Business outlook on the economy turned slightly less optimistic for Q3 2016, with the overall confidence index (CI) declining to 45.4 percent compared to 48.7 percent in the Q2 2016 survey. This indicates that the number of optimists declined but continued to be greater than the number of pessimists during the quarter. The confidence index is computed as the percentage of firms that answered in the affirmative less the percentage of firms that answered in the negative with respect to their views on a given indicator.

Despite the typical decline in sentiment during the third quarter due to seasonal factors, the current quarter index is the highest Q3 reading of all time. Respondents attributed their less buoyant outlook to expectations of: (a) interruption of business activities during the rainy season, (b) slack in demand during the planting and closed milling seasons, (c) lower consumer demand as households prioritized enrolment expenses, (d) implementation of stricter new mining policies that put some mining concessions on hold, (e) closed fishing season in Davao Gulf from July to September, (f) stiff competition, and (g) concerns over the weak global economy. The sentiment of businesses in the Philippines mirrored the less buoyant business outlook in the US, UK, Germany and Hong Kong, but was in contrast to the more bullish views of those in France, Italy, South Korea, India and Switzerland.

For the quarter ahead (Q4 2016), business outlook turned more upbeat as the next quarter index rose to 56.8 percent from 45.3 percent in the previous quarter's survey results. This reading suggests that growth could accelerate in the last quarter of 2016. Respondents' more positive outlook for Q4 2016 was due to expectations of: (a) the expected uptick in consumer demand during the holiday, harvest and milling seasons, (b) increased confidence in the new administration, (c) continued increase in orders and projects translating to higher volume of production, (d) expansion of businesses and new product lines, (e) introduction of new and enhanced business strategies and processes, (f) improved farm gate prices, and (g) opening of high seas/fishing operations in October. Their more positive outlook was further driven by expectations of an acceleration in the roll-out of infrastructure and other development projects under the public-private partnership (PPP) program and the favorable macroeconomic conditions in the country (particularly, stable inflation and low interest rates), sustained foreign investment inflows and the steady stream of overseas Filipinos' (OFs) remittances.

The outlook across trade groups is mixed

The outlook of businesses involved in international commodity trading was mixed for Q3 2016. Among business types, importers and domestic-oriented firms' views were relatively less favorable. Meanwhile, the optimism of exporters and dual-activity firms improved. For the quarter ahead (Q4 2016), the sentiment across different types of businesses was more optimistic, with the exception of dual-activity firms.

Business confidence across sectors is broadly less favorable

Business sentiment across sectors was generally less upbeat for Q3 2016 and more buoyant for Q4 2016. This is with the exception of the construction sector, whose outlook was more favorable for the current quarter but deteriorated slightly for the next quarter.

Industry firms (i.e., mining and quarrying, manufacturing, and electricity, gas and water) were less optimistic for Q3 2016 largely due to the usual slack in production activities during the rainy season, stiffer competition, and decrease in sales receipts of energy firms with the decline in power rates. Meanwhile, firms in the agriculture, fishery and forestry sub-sector were bullish as they expected more favorable farming conditions with the end of El NiAo.

Likewise, due to the seasonal slack in demand in the third quarter, the outlook of the wholesale and retail trade sector was less buoyant compared to that a quarter ago. Trading firms' outlook was dampened by the sluggish demand during the planting season/closed milling season, adverse effects of weather disturbances (with the expected onset of La NiAa), and concerns over the economic situation in Europe.

The outlook of the services sector remained favorable although less upbeat for the current quarter, generally on account of the seasonal sluggish demand during the rainy season. The less optimistic sentiment emanated from the outlook of the hotels and restaurants, community and social services, and transportation sub-sectors. Meanwhile, firms engaged in financial intermediation registered the highest CI (albeit lower compared to that of last quarter). Respondents from the real estate and business sub-sectors expected an increase in demand for industrial and commercial real estate as well as credit and investment information, respectively.

Meanwhile, the outlook in the construction sector improved for the current quarter compared to the previous quarter on account of the sustained demand in construction services (both public and private). Government infrastructure spending is expected to accelerate while business expansion projects continued for the third quarter.

Firms are steady about their outlook on own business operations

With respect to their own operations for Q3 2016, the outlook on the volume of business activity was steady compared to that a quarter ago. In particular, the outlook of firms was more buoyant in the industry and services sectors, steady in the wholesale and retail trade and less optimistic in construction.

Employment outlook index is steady

The employment outlook index for the next quarter was broadly steady at 23.6 percent from 23.8 percent in the last quarter's survey. The positive reading indicates that more firms will continue to hire new employees than those that said otherwise.

The number of firms with expansion plans declines while capacity utilization increases

The percentage of businesses with expansion plans in the industry sector for Q4 2016 decreased to 28.1 percent from 30.3 percent a quarter ago due largely to weaker expansion plans of firms in the manufacturing sub-sector. Meanwhile, the average capacity utilization for Q3 2016 was higher at 74.9 percent from 74 percent a quarter ago.

Firms expect better financial conditions and easy access to credit

The financial conditions index remained steady at 1.5 percent for Q3 2016 from 1.3 percent in the previous quarter. This means that firms that expected better financial conditions continued to outnumber those that said otherwise during the quarter. Firms were also of the view that their financing requirements could be met through available credit as respondents who reported easy access to credit exceeded those that said otherwise. However, the number that said so decreased compared to that a quarter ago.

Inflation is expected to remain low

Respondents who expected inflation to go up continued to outnumber those that held the opposite view for the current and next quarters, but the number that said so declined relative to the previous quarter. Businesses expected the rate of increase in commodity prices to remain low at 1.5 percent for Q3 2016 and 1.6 percent for Q4 2016.

Meanwhile, more respondents anticipated the peso to depreciate for Q3 2016 but to appreciate for Q4 2016. Lastly, firms expected that interest rates would be higher for Q3 and Q4 2016. However, interest rate expectations were expected to be tempered for Q3 2016 as the number of firms that expected higher interest rates declined against quarter-ago-expectation. For Q4 2016, the number of business that anticipated the interest rates to increase remained steady relative to a quarter-ago level.

About the Survey

The Q3 2016 BES was conducted during the period 1 July - 12 August 2016. There were 1,474 firms surveyed nationwide. Respondents were drawn from the combined list of the Securities and Exchange Commission's Top 7,000 Corporations in 2010 and Business World's Top 1,000 Corporations in 2014, consisting of 587 companies in NCR and 887 firms in AONCR, covering all 17 regions nationwide. The survey response rate for this quarter was higher at 83.8 percent (from 82.9 percent in the previous quarter). The response rates were both higher for NCR at 80.7 percent (from 80.2 percent in the previous quarter) and AONCR at 85.8 percent (from 84.7 percent in Q2 2016).

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